IMF’s Greek Euro Exit Analysis

We’re a tad late getting to this, but the International Monetary Fund in its latest report on the Greek bailout took an interesting look at how far euro-zone economic output would fall if Greece ditched the common currency. The fund’s answer: Maybe a lot, maybe not so much – though even the “not so much” scenario looks pretty bad.

The immediate problem for the euro zone is that a resurrection of the drachma would leave many of Greece’s public and private-sector debts to foreign creditors denominated in euros. The drachma would devalue sharply against the euro, helping solve Greece’s competitiveness problems but also making it difficult to repay its foreign debts.

Even so, the direct costs of Greece exiting the euro zone (Grexit) would be small, the IMF says. That’s because private-sector exposure in the rest of the euro zone to Greece has been falling for some time, as Greek government debt held by the private sector has been restructured and imports purchased by Greece’s pancaked economy have plunged; the IMF says Greece’s liabilities to the private sector in the rest of the currency area have fallen to less than 1% of the euro zone’s gross domestic product.

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The Greece exposure of the euro zone’s public sector has risen, reflecting the huge sums lent to the country in the form of bailout loans for the government and cash for banks via the euro zone’s central banking system. But this exposure is relatively small, only about 2% of the rest of the euro zone’s GDP, leading to “relatively modest” increases in government debt, the fund says.

The IMF doesn’t mention this, but Greece defaulting on money lent by the European Financial Stability Facility, the euro zone’s temporary bailout fund, would have only a small impact on member state debt burdens. That’s because Eurostat, the EU statistics agency, ruled in 2011 that each government backing the EFSF must register its share of loans made by the EFSF as government debts when the loans are made. The same is true of the bilateral loans made to Greece under the country’s first bailout.

So almost all the damage to government debt levels done by outstanding bailout loans to Greece has already been done (there would be a small hit from Greece defaulting, because the EFSF would no longer receive income from the minimal interest Greece is now paying on its EFSF loans). The EFSF is expected to lend €144.7 billion to Greece through 2014, and the member states have already lent Greece €52.9 billion in bilateral loans through December 2011.

The real risk, the IMF says, is contagion. Grexit could spark a run on countries across the euro zone periphery. Depositors might yank their deposits from banks in Portugal, Ireland, Spain and Italy. Foreign banks would refuse to extend credit to companies in these countries; foreign companies could refuse to trade with them. In short, an economic catastrophe that could result in a breakup of the euro zone.

Yet even the risk of contagion appears to have fallen in recent months, the fund says. Movements in the price of credit-default swaps on sovereign bonds indicate an increasing disconnect between Greece and the rest of the euro-zone periphery. “Market–based proxies of contagion risk suggest that the likelihood of spillovers in case of exit and default has fallen over time,” the fund writes, with a Mount-Olympus-sized caveat: “The simple statistics presented here should nevertheless be interpreted with caution: they do not imply causation, they are not robust to common shocks affecting both Greece and other vulnerable countries and, in the case of correlations, across-the-board spikes in volatility can bias the statistic upwards.”

That’s not very comforting.

What’s the range of economic output losses projected by the IMF if Greece leaves? The fund sees nearly a 2% loss to euro-zone real GDP in the first year, under a low-impact scenario like what happened when the giant hedge fund Long-Term Capital Management collapsed in 1998; and around a 6% hit under a high-impact scenario rivalling the collapse of Lehman Brothers

So, even the IMF’s best-case analysis of a Greek exit sees the euro zone probably being dragged back into recession – if, that is, it has managed to emerge from its current recession.

Comments (5 of 8)

^lol michel, one of those euro lovers. can't be without your sweet european dream huh? sorry to break to ya, but we europeans will be just fine without your overreaching superstate, thank you very much.

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What a shameful LIE!!! An IKA pension of, say,700 or 800 euros per month or even lower was reduced by about 15% (14 monthly pensions p.a. were reduced to 12), and an auxiliary one (epikouriki)of, say,400 or 500 euros per mo. or less was reduced by more than half.

And now that the IMF acknowledges that they made a mistake re multipliers, how can they compensate the Greek people for all the suffering they have caused?

4:36 am February 4, 2013

michel wrote:

Europe is in trouble;Greece is in trouble,and as always the nazis are showing by the thousands inthe streets.
They will never learn. Next step is the complete catastrophe.Bye Bye Europe,Bye Bye Greece.

4:58 pm February 2, 2013

freedom wrote:

It's individuals like Michael that propogate this problem only further. You talk as if the EU has just been so unbreakable, so angelic...that it has done so many wonders for Europeans. In fact, most of what has been done to strengthen the EU has been without any of European's knowledge and with little to none of their input. Referendums, thrown around as if a threat, are little more than public theater and merely an afterthough to whatever the political elite feels is "right" for the European dream. It's just another cover for control and subjugation. Germany now pretty much runs the show, despite how much throughout the 20th century, other countries thought of these pan-European projects as trying to lower Germany's iinfluence. Alot that did in the end eh? Many people without jobs or unable to provide for their families, more banks and financials kept propped up on the taxpayers' dime, and more division between countries then ever. So much for that "one Europe" nonsense.

Contrary to those who subscribe to the infallibility of the "United States of Europe" mentality, the people (Greece and elsewhere) will be better off, heck will be in more control of their own destiny, if they left the EU/eurozone. The idea that it will be unhindered anarchism in Europe, with no order of any kind, if the EU/euro ceases to exist...just shows how much such "lovers of the people" value the people themselves and dispise democracy at it's core. Europe existed before them, it'll exist afterward as well. It might be a tough road at first, but people will be better off for it.

10:38 am February 2, 2013

Michael wrote:

What good did the drachma for Greece with all those Greek politicians who were professors of Economics in the last 30 years that would have to be repeated again?

We look forward, not backwards! It's is insane to suggest an exit from Eurozone and even worse EU. We founded EU to stop bloodshed between our people in Europe and to prevent the rise of fascism/communism again in the future.

Any attempt from outside or inside the EU to dissolve it either verbally or physically represents the gravest threat to our modern civilization and the onset of WWIII. We have to be united and not divided by banksters, politicians, journalists etc who have no clue of history or have vested interest to see EU fail.

If EU fails then the rest will follow. Unless you consider sweat-shop jobs as a way of life.

Greeks need to fight along with the rest of their European brothers within the EU for a better future not something regressive as dumping the European Dream which some people are trying to convert into a nightmare.

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The Wall Street Journal’s Brussels blog is produced by the Brussels bureau of The Wall Street Journal and Dow Jones Newswires. The bureau has been headed since 2009 by Stephen Fidler, who was previously a correspondent and editor for the Financial Times and Reuters. Also posting regularly: Matthew Dalton, Viktoria Dendrinou, Tom Fairless, Naftali Bendavid, Laurence Norman, Gabriele Steinhauser and Valentina Pop.